Financial Commentary – Kim Hin (Jan 17)

We are taking a cautious view on the 2017 outlook given the recent adverse developments. The fuel makes up 35% of the plant’s production cost and the recent spike in oil price will add pressure to the near-term operating margins. Looking forward, we expect these negative factors will be partially mitigated by the production expansion and benefit from stronger USD. Currently, the EV / EBITDA is trading at 4.6x which seem to be at the reasonable level (if not low).

Kim Hin announced the acquisition of Johan Ceramics Bhd (adding 75% to Peninsular Malaysia’s production) and investment in Shanghai Plant (adding 25% to China’s production) would increase the top line significantly. Concurrently, it is aiming to expand the presence in Australia with Johnson tiles which are more premium and selling at 10% higher than existing tiles. Potentially shifting its revenue mix to higher margins.

Kim Hin holds 20% market share in Malaysia which exhibits challenges due to the decline in purchasing power (thanks to deterioration in MYR and hike in oil price). A significant amount of revenue is exported to oversea which is denominated in USD. Thus we believe near-term bottom-line result will be supported by forex gains.

Although the P/E is currently close to plus one standard deviation, we checked it against the peers. As of 6/1/17, White Horse is trading @ 10.3x, YiLai @ 16.9x and Seacera @ 25.1x. The average is around 13.6x excluded Seacera which is still within a reasonable range.

Its discount to the net assets provides some comfort but do not expect any material improvements to 1.0x in foreseeable future.

We downgrade the outlook from BUY to NEUTRAL (with a positive bias) with a target price of RM2.06 (upside potential of 12.6%) given the near-term challenges from sluggish domestic demand and rising oil price which will add pressure to the operating margins. However, we expect the revenue profile to be supported by the foreign sales denominated in USD and capacity expansion.

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